Determinants of transfer pricing decision at manufacturing companies of Indonesia

Supriyati Supriyati,Kadek Pranetha Prananjaya,Dewi Murdiawti

doi:10.20525/ijrbs.v10i3.1118

Supriyati Supriyati, Kadek Pranetha Prananjaya + Show 1 more

Open Access

https://doi.org/10.20525/ijrbs.v10i3.1118

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Abstract

This paper examines the effect of tax avoidance, bonus mechanism, debt covenant, tunneling incentive, audit quality, multinationality, foreign ownership, and company size on transfer pricing. This research population is all manufacturing companies that list at Indonesia Stock Exchange on the period of 2016-2018 but the collected data are on a period of 2015-2019. The sampling technique uses a purposive method to obtain 275 samples in the observation period of 2016-2018. The method of this research involves descriptive statistic test, classical assumption test, and hypothesis test. A regression test is used for testing the hypotheses. The result of the research shows that tax avoidance, debt covenant, and company size have a significant effect on transfer pricing decision. The factors are multinationality, foreign ownership and audit quality also have a significant effect on transfer pricing decisions. Meanwhile, bonus mechanism and tunneling incentives do not significantly affect transfer pricing decisions. Conclusions from this research is a lot of factors involved in the transfer pricing decision. One from inside the company and the others from an outside company. Transfer pricing is a tool to achieve certain goals. The purpose of transfer pricing can be categorized as internal goals and external goals. The manufacturing companies when deciding about transfer pricing must be careful because there are two perceptive about transfer pricing. One perceptive from a business that transfer pricing is something useful because a company can save money related tax but the other perceptive from the government side, transfer pricing has believed to be able to have reduced or even disappearing potential for a country’s tax revenue.

Highlights

The Rapid growth of the activity of the business as well as related business which happens between companies in various countries, bring existence the globalization of the economy that made an impact rising transaction transnational
Transfer pricing is selected because it takes benefit from different tax regulation applied at different country, and transfer pricing is proved to be successful in improving company profit (Pil et al, 2020). This finding is consistent with the finding given by Faizi (2018), which said that tax avoidance has effect on transfer pricing decision
Foreign ownership in Indonesian manufacturing companies has reached over 20% and this proportion makes some foreigners to always be involved in the making of transfer pricing decision

Summary

Introduction

The Rapid growth of the activity of the business as well as related business which happens between companies in various countries, bring existence the globalization of the economy that made an impact rising transaction transnational (cross-border transaction). The companies were forced by this situation to conduct various forms of transactional shift in order to maintain their income and profitability. One form of such shift is transfer pricing, which is often conducted among companies that are closely related (affiliated) (Wier, 2020). Problem often occured with transfer pricing is that different countries may apply different tax rates Such difference often forces multinational companies to make transfer pricing decision based on transactional price applied in privilege relationship they have with other companies (Drake et al, 2019; Wier, 2020)

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Conclusion